Ding dong the provisional tax is dead

Provisional tax is being reformed, with a new pay-as-you-go option giving up to 110,000 small businesses a way to pay tax as they earn income from 1 April 2018.

Use-of-money interest will be eliminated or reduced for the vast majority of taxpayers.

Contractors will be able to choose a withholding tax rate that suits their needs, rather than one being set for them.

The ongoing 1 per cent monthly penalty will be scrapped from 1 April 2017 for new debt – although immediate penalties and interest charges for late payments will continue to apply.

Like most small business owners, I dislike provisional tax. Your provisional tax is calculated on your previous year, and if you have a better year than expected, then you get whacked with penalty interest for not having paid enough provisional tax earlier in the year.

A pay as you go option is a great idea, and very easy to do with modern accounting software.

“Around 30 to 40 per cent of businesses currently use cloud-based accounting software. This is expected to grow to 85 to 90 per cent in the next 10 years.

“This package allows small businesses to pay provisional tax through their accounting software, rather than having a separate process for their taxes.

“Small businesses are the backbone of the New Zealand economy. We want to help them spend more time focused on their business, not their taxes.”

Comments (32)

Captain Mainwaring

anonymouse

The death of removal of provisional tax from SMEs will be widely welcome, and appears to be possible as direct result of the IRD IT upgrade,

The package is expected to cost $187 million over four years.

The big question is does this actually need new money to fund it, or will IRD be able to do it as a dividend from the multi hundred millions that the IT upgrade is costing, without a baseline increase…

simo

ztev

With 30-40% of SME using cloud accounting software ( cloud process isnt a necessity and can be a hindrance, eh Banklink Books does all the processing on your work computer)

Why do cloud servers have to be the only offering. Is this something to boost Xero offers as part of allowing them IRD access to your files ?

There is still a time period chosen, is it every month or maximum every 6 months.
Its all very well to pay IRD as a transactional process like wages every week, but to pay taxes which include a lot of deductions and investment decisions, dont really have much faith in ” I Really Do” have no idea

eszett

Your provisional tax is calculated on your previous year, and if you have a better year than expected, then you get whacked with penalty interest for not having paid enough provisional tax earlier in the year.

Actually, I believe if it is calculated (by the IRD) on your previous year they cannot sting you with penalties if you do better than they forecasted. It”s only if you do the forecast yourself that you get a penalty if you are wrong.

Nevertheless provisional tax is a major pain, especially for those business with a high variance in income.

Tarquin North

Paying provisional tax is like being on a very depressing roller coaster, one year you think you’ve cracked and the next you nearly go broke paying for it. I suppose I could try a bit of frugality or, dare I say it planning ahead but where’s the fun in that? Hands up who has at tax account you’re supposed to put the money in as you go, all works well till things get a bit tight.

The penalty taxes for lateness, or IRD revisions were horrific. They caused family misery and suicide. Only the toughest and most belligerent [ like David Henderen ] could fight it. Others fled to other jurisdictions. The penalty taxes came from the Muldoon days of 20% inflation… Never talk to an IRD officer / put everything in writing / ‘ this is my position.. ‘ etc.

ross411

What about contractors? Do they need to now become official businesses? It seems aimed at proper businesses, as for manual processing it requires a business bank account and double entry accounting. Or to give my data to a third party accounting system, and pay a tax to them. I don’t mind pay as you go tax, but not sure how much more BS this introduces to my excel spreadsheet processes.

themanwhowatches

The IRD paper tells us that 75% of provisional taxpayers are individuals. I cannot find any stat showing how many of these operate within a company structure – but only those who do will benefit from (some of) the proposed changes. Therefore it appears that self employed individuals such as me will still be shackled and punished by the current punitive system despite being very minor contributors to the total tax take and, therefore, logically should have a simplified system. If I interpret the IRD proposals correctly and they are eventually implemented in that way, ie self employed are excluded from the new provisional tax provisions, National will not be getting my vote regardless of how awful the alternatives are. The final nail will go into the coffin as far as I am concerned.

kiwi in america

themanwhowatches
You sound suspiciously like a Labour plant particularly when you make a threat to not vote National over an issue you seem to be so ignorant about. The reform is specific to provisional tax not the manner in which the small business is structured. The provisional tax regime operates for anyone who is not taxed at source (PAYE) regardless of whether they are a sole trader, a partnership, a company or even a trust that operates a ‘for profit’ business. The term self employed in the context of this reform is not limited to those who operate their business inside a limited liability company.

Whilst it has been a while since I’ve had to file provisional tax returns in NZ, I remember it as a particularly pernicious regime during periods when my income fluctuated. This is a huge reform and will be welcomed by the hundreds of thousands of small business owners who are the backbone of the NZ economy.

tom hunter

I don’t know about Labour, but themanwhowatches has been a relentlessly partisan commentator for left-wing causes in general. Amusing to see this faux, I-might-have-voted-for-National bullshit pushed in the light of easily trackable comment history.

Ross12

themanwhowatches

KIA, you show your own ignorance. I am very familiar with provisional tax for the self employed having endured it for years – and it is current knowledge unlike, it seems, your own. I have many accountants bills to show for it. I have also read the IRD papers released today, which I suggest you do too before jumping ignorantly into the debate.

gazzmaniac

I, for one, am very happy with this. It’s not going to be flash, but it will actually make a real difference to a lot of people. It will make my taxes far simpler, which will be great (though my income isn’t as elastic as a lot of others). Changing the penalty interest regime will also be very welcome (again, not for me, but a lot of people).

I agree, this isn’t a major shift, but it will cause actual improvement for many. Government sometimes needs to fix actual problems, rather than always just looking at ‘the big picture’ (they are just as responsible for provisional tax as they are for the rate of income tax). So nice to see some practical changes, rather than the raft of rubbish I’ve seen in the past year and a half.

So I’m reading the document now. A company will be able to act as an agent for a shareholder-employee and discharge their tax liability (that will make my life easier). However, even if not considering that, the bottom of page 24 (on the left) is telling:

‘The AIM method will be available to all provisional taxpayers with a turnover of $5 million or less.’

PaulP

The only issue I see with this is that it is likely the tax will be due with your two-monthly GST payment.

It’d be nice if a business could choose alternate months where GST is due one month and prov tax based on that return the following month. As income tax is on an accrual basis rather than cash basis this would tie into the cashflow of a small business better when their customers might actually pay them.

And, while you’re at it do something about the 15 Jan stupid due date for the 30 Nov period end. For many businesses 15 Jan is a low cashflow period and many are on holiday. I know businesses should have their GST and income tax aside but sometimes that’s not the reality.

Casual Spectator

That’s excellent news.
The Left bribes people with other peoples money. National “bribe” business owners by making their lives easier.
One question, does this only apply to companies? or sole traders too?

deadrightkev

kiwi in america

themanwhowatches
As Tom Hunter says, you’re a left wing partisan albeit one who clearly does run his own business. If you’d read the IRD briefing documents properly you’d have seen that they talk about this change applying to ALL small businesses not just ones run as a company. Perhaps you mistook the word “enterprises” to mean “companies” but that is not the case. If you are as up with the play as you claim, you’d know that provisional tax is paid by any self employed person or entity not subject to employee deducted PAYE and that includes sole traders and partnerships not trading as a company. To threaten to not vote National over your ignorant misreading of the policy change is nothing more than embarrassing trolling on behalf of your true masters – most likely Labour.

nickb

cmm

“Your provisional tax is calculated on your previous year, and if you have a better year than expected, then you get whacked with penalty interest for not having paid enough provisional tax earlier in the year.”

In fairness there was nothing preventing you paying more (or less) provisional tax. With provisional tax you can just treat it as pay as you earn, paying in more as you go. I’ve done that before.

NZ has very simple tax (and small business) laws which make it a great place to run a small business. Making it even easier is always a good way to encourage more business growth.

Ed Snack

It has been a few years since I was paying provisional tax when self employed, but the rule used to be that if you took the IRD figure (based on the previous years declared earnings) and used that you were not subject to any penalties on under payment. You only got those if you reduced the assessment below the IRD figure and elected to pay that instead.

But yes, tough to fund if business took a down turn. I had a policy of taking 25% of all invoices and placing them in a specific account, which tended to look like a nice little amount until the tax payment became due and it largely emptied out !

Of course the rules may well have changed, but the penalties did only apply as above. A growing business has no trouble with this; taking the IRD assessment usually meant on provisional under-payment that needed settling at year end but without penalties. A static business might have more trouble especially after an unusually good year. However there are or were provisions whereby you could increase your provisional tax during a year and so avoid all or most of the penalties. I think it was through providing a new assessment at a higher level and paying the higher amount plus the balance of the previous payment, but that may be a faulty recollection. My point being it wasn’t as onerous as some make out, or at least it wasn’t to me. It can be hard though, transitioning from a PAYE situation where what you get in the hand is after tax to one where you have to set aside a proportion to pay tax. It makes one far more aware of the taxation level and just how much of your earnings it eats up.

It is often said that if they did away with PAYE and mandated that people were paid their total earnings and then had to specifically pay their tax amount periodically, the resistance to taxation and to increases in taxation would be considerably higher. PAYE disguises the proportion of ones earnings being taken.